Savings can be tricky.
Especially in Ireland they can be difficult to navigate as while anyone with a mortgage will be able to tell you that interest rates have increased, many savers wouldn’t know it.
In fact, Irish banks are among the worst in the EU for passing on the higher interest rates set out by the European Central Bank (ECB) onto their savers.
However between then, AIB and Bank of Ireland have €60 billion with the ECB that is earning them high interest rates.
The latest ECB interest rates range from 3.75 per cent to 4.25 per cent depending on deposit type.
According to the Competition and Consumer Protection Commission (CCPC), someone who’d like to open a deposit account to save €1,000 per month would earn 2 per cent interest per year at best.
If you’re thinking of opening a savings accounts, here are the basic things to be aware of, according to Sean McNulty, founder and managing director of rethinkmoney.ie.
Interest Rate: This is the percentage of your savings that the bank or financial institution will pay you as interest. Higher rates mean your money will grow faster. Look for the Annual Equivalent Rate (AER) to see how much interest you’ll earn over a year, taking into account the effect of compounding.
Access: Determine how often and easily you want to access your savings. Some accounts may offer higher interest rates but might restrict your access to the funds (e.g., fixed-term savings accounts).
Fees and Charges: Be aware of any monthly or annual fees, transaction fees, or penalties for withdrawing funds early.
Minimum Deposit: Some savings accounts require a minimum amount to be deposited when opening the account, or they may require you to maintain a certain balance to earn the advertised interest rate.
Deposit Guarantee Scheme: In Ireland, eligible deposits in banks are protected up to €100,000 per depositor per bank under the Deposit Guarantee Scheme. This provides some level of security in the rare case that a bank goes bankrupt.
Bonus Rates: Some banks offer a bonus interest rate for an introductory period, which can be enticing. However, knowing when this rate expires and what the regular rate will be afterwards is essential.
Inflation: Ideally, you’d want an interest rate that outpaces inflation so your money’s purchasing power doesn’t decrease over time. Always compare the offered interest rate to the current inflation rate.
Taxation: Interest earned on savings can be subject to the Deposit Interest Retention Tax (DIRT) in Ireland unless you’re exempt. It’s good to be aware of this when calculating your potential returns.
Customer Service & Reputation: Lastly, consider the bank’s reputation and the quality of customer service. Reading reviews and asking friends or family can give you a good idea.
Investments
Sometimes however saving isn’t the best way to use the money you don’t need right now but will need in the future.
If you want the money to purchase something in the next one to three years, such as saving for a holiday, car or wedding then saving is likely the better option for you.
Saving is typically safer than investing as you’ll usually be able to get your deposit back.
Investing is to be used when the timeframe means that if the market takes a turn downwards, you may be able to wait it out.
Investing is for purchasing things that are three or more years ahead of you.
Retiring, buying a home or education are all examples where putting your money in investments can work best.
“Over the long term, investments, especially equities, have historically outperformed other asset classes and have a better chance of beating inflation,” said McNulty.
“This means the real value of your money can grow over time.”
“Investment vehicles like pension plans or other retirement accounts can benefit from compound interest over time and are essential for a comfortable retirement,” he added.
Typically, a higher tolerance is risk is needed for investments as they could decrease temporarily in exchange for potential of higher returns in the long run.
“Through investing, you can diversify across various assets, sectors, and geographies, which can spread risk and potentially offer more stable returns over time,” McNulty said.
Here are three things to think about before you decide to invest according to McNulty of rethinkmoney.ie
Emergency Fund: Everyone should have an emergency fund for unforeseen circumstances like medical emergencies, sudden job loss, or urgent home repairs. This fund is generally recommended to cover three to six months of living expenses and should be easily accessible.
Predictable Expenses: If you have known expenses in the near future, such as tuition fees or house deposits, saving is a more predictable way to ensure the required funds are available when needed.
Low-Risk Tolerance: If the idea of losing any portion of your money causes significant stress, a traditional savings account or other low-risk financial instruments might be more suitable.
Saving versus investing
“Both saving and investing have their place in personal finance,” said McNulty
“Often, individuals will do both simultaneously: saving for short-term needs and emergencies while investing for long-term growth and wealth accumulation.
“The key is to align your financial strategies with your goals, risk tolerance, and time horizon.
“It’s also worth noting that investing always carries inherent risks, so it’s essential to do your research, understand your investment choices, and, if possible, consult with a financial advisor to guide your decisions.”
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